Risk Management and Basel by hcr99481

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Basel III:
A Risk Management
Perspective - 2011
25 May 2011
Agenda (1/2)
8:30 – 9:00     Registration and welcome

9:00 – 9:15     Introduction
                Rima Adas, Banking Leader, PwC

9:15 – 9:45     Part 1 - Basel III recent developments
                Emmanuelle Henniaux, Partner, PwC

9:45 – 10:30    Part 2 - ICAAP update and new Circular on stress tests
                Claude Wampach, Surveillance des banques, CSSF

10:30 – 11:00   Coffee break

11:00 – 11:30   Part 3 - Bankers View
                Paul Marcy, Risk Manager, Banque Raiffeisen

11:30 – 11:50   Part 4 - The new liquidity requirements – view from the industry
                Gilles Pierre, Banking Supervision, ABBL


                                                                            May 2011
PwC                                                                           Slide 2
Agenda (2/2)

11:50 – 12:25   Part 5 - Roundtable – How to prepare for the new requirements?
                With the participation of:
                - Patrizio Borgognoni, Executive Director, UBS
                - Claude Ludovicy, Head of Risk Portfolio Management,
                  BGL BNP Paribas
                - Paul Marcy, Risk Manager, Banque Raiffeisen
                - Gilles Pierre, Banking Supervision, ABBL
                - Claude Wampach, Surveillance des banques, CSSF
                Moderated by: Thierry López, Risk Management Leader, PwC

12:25 – 12:30   Conclusion
                Emmanuelle Henniaux, Partner, PwC

As from 12:30   Walking lunch



                                                                          May 2011
PwC                                                                         Slide 3
Rima Adas
Partner, PwC
Basel III recent
developments
Emmanuelle Henniaux
Partner, PwC
Part 1 - Basel III recent developments

Basel III – Why?

Summary of upcoming changes

Likely IT & operational impacts




                                    May 2011
PwC                                   Slide 6
Basel III – Why?




                   May 2011
PwC                  Slide 7
Part 1 - Basel III recent developments
Basel III – Why?



“ There are many factors that led to the build up of the crisis. At the
top of the list is excess liquidity, resulting in too much credit and
weak underwriting standards. The vulnerability of the banking sector to
this build up of risk in the system was primarily due to excess
leverage, too little capital of insufficient quality, and
inadequate liquidity buffers. ”


                                                                            Stefan Walter
                                      Secretary General, Basel Committee on Banking Supervision

                                                                               November 2010




                                                                                     May 2011
PwC                                                                                    Slide 8
Part 1 - Basel III recent developments
Basel III – Why?
The financial crisis has resulted in a multitude of regulatory proposals from stakeholders at
global, regional and national level



                      Financial Stability                                 European Commission
                      Board                                               European Parliament
                                                    Europe
 Global
G7 / G8 /             Basel Committee on                                  EBA (formerly CEBS)
  G20                 Banking Supervision
    v

                                                                          CSSF
                      IASB                           Local
                                                                          BCL




                                                                                      May 2011
PwC                                                                                     Slide 9
Summary of
upcoming changes




                   May 2011
PwC                 Slide 10
Part 1 - Basel III recent developments
Summary of upcoming changes

        Reinforcement of the banking sector supervision


                        The wider Basel III framework

      OTC derivatives markets                           Accounting topics


                      The « pure » Basel III framework:
                        Capital requirements & new buffers
                                  Leverage ratio
                                  Liquidity ratios


             Higher capital requirements for   Framework for dealing with
             systemic banks                    failing banks


                                                                            May 2011
PwC                                                                          Slide 11
Part 1 - Basel III recent developments
Summary of upcoming changes
Basel III will result in less available capital to cover higher RWA requirements and more
stringent minimum coverage levels.
 Less available capital through stricter definition of capital                        Higher RWA requirements to better capture risks related
 with greater deductions that emphasize stronger quality                              to trading, securitisation, and counterparty exposures

Basel III                                                                             Basel III

                         50/50 deduction & others                                                                             CVA & counterparty risk

                            AFS/Pension
                                                              Available                                                   Securitisation        RWA increase
                                                            capital decline                                                                  depends on business
                                DTA/MSRs/                    depends on                                                                             and
                                Invest. in financials      capital structure                                           Incremental risk         exposure mix
                                    Minority interest
                                                                                                                    Stressed VaR
                                        Preferred Stock

 Basel I                                                                              Basel I

 Significant increases in minimum required levels of capital and liquidity
/ Minimum
  Well Capitalised    Tier 1 Common*                    Tier 1 Capital*                Total Capital*                 Leverage                 Liquidity Ratio


                                                                                                                                               New Coverage
       Basel III                      7%                                   8.5%                        10.5%                                   and Net Stable
                                                                                                                             3%
                                                                                                                                               Funding Ratios
                                     +500 bps                              +450 bps                      +250 bps                 +300 bps
                             3%                                       6%                           10%
       Basel I                                                   4%                               8%                    NA
                                                                                                                                                        NA
                           2%


* Includes conservation buffer, but does not include a 0%–2.5% countercyclical buffer.
                                                                                                                                                          May 2011
 PwC                                                                                                                                                       Slide 12
Part 1 - Basel III recent developments
Summary of upcoming changes
Key changes brought about by Basel I, II, and III and equivalent Luxembourg regulation
                 Tier 1, 2 & 3 definition                                                             1 New capital definition

Capital Ratios                                                                                        2 New capital buffers
and Targets                                                                                           3 New leverage ratio
                                                                                                      4 Higher minimum ratios
                                                                                                      5 Systemic add-on

                                            Pillar-3 Disclosure
                                            Pillar-2 ICAAP & SRP          New Large Exposures
RWA
Requirements                                Pillar-1 Operational risk     Incremental risk
                 Pillar-1 Market risk       Pillar-1 Market risk          Trading book revisions
                 Pillar-1 Credit risk       New Pillar-1 Credit risk      Securitization revision


                                                                                                      6 Liquidity coverage ratio
Liquidity                                                                                             7 Net stable funding ratio
Standards
                                            BCL 4th règlement
                 CSSF 93/104                CSSF 09/403


                     Basel I                    CRD - Basel II          CRD II & III – “Basel II.5”       CRD IV – Basel III
                   CSSF 00/10                    CSSF 06/273            CSSF 10/475 & 10/496                CSSF 12/xxx(?)
                                                                                                                      May 2011
PwC                                                                                                                    Slide 13
 Part 1 - Basel III recent developments
 Summary of upcoming changes

1 New Capital Definition

   Three main areas of focus:
    Revision of the regulatory capital structure:

    a) Tier 1 – going concern capital:
        Core Tier 1 – common equity, and
        Non-core Tier 1 – hybrid capital (strict eligibility criteria)
    b) Tier 2 – gone concern capital
    c) Tier 3 – abrogated

    Harmonisation of regulatory capital deductions (holdings in financial
     subsidiaries, Deferred Tax Assets, etc.) and their treatment across
     territories: progressive full deduction from Common Equity Tier 1

    Publication of detailed disclosures of regulatory capital elements,
     adjustments and reconciliations

                                                                           May 2011
  PwC                                                                       Slide 14
 Part 1 - Basel III recent developments
 Summary of upcoming changes

1 Empirical study over the change in capital (1)

    Estimated impacts of new capital definition rules
    Group 1 banks are those that have Tier 1 capital excess of €3 billion, are well diversified, and are
    internationally active. All other banks are considered Group 2 banks (%)
                                                  Change in CET1   Change in Tier 1      Change in Total
                         Number of banks          Capital *        Capital               capital

            Group 1              87                    -41.3             -30.2                 -26.8

           Group 2               136                   -24.7              -14.1                -16.6


        * The column « Changes in CET1 capital » compares gross CET1 capital (without deductions) with net CET1
        capital



        Source: http://www.bis.org/publ/bcbs186.pdf




                                                                                                                  May 2011
  PwC                                                                                                              Slide 15
 Part 1 - Basel III recent developments
 Summary of upcoming changes

1 Empirical study over the change in capital (2 ) – CET1 deductions

    Breakdown of the elements that compose the deductions from gross CET1
    to net CET1 (%)




          Group 1         87        -19.0      -4.6   -4.3   -7.0   -0.4   -2.4   -3.6   -41.3   -2.0


          Group 2         136        -9.4      -4.6   -5.5   -2.8   0.0    -1.0   -3.7   -24.7   -2.1




        Source: http://www.bis.org/publ/bcbs186.pdf




                                                                                                   May 2011
  PwC                                                                                               Slide 16
 Part 1 - Basel III recent developments
 Summary of upcoming changes
  New capital buffers
2 Capital Conservation Buffer

   Save for a rainy day
   Create buffers in ‘good times’ that can absorb shocks in periods of stress
    (includes capital distribution constraints when capital levels fall within a
    specified range above minimum requirements)
   Impose good bank governance by increasing regulators’ power (e.g.
    limit ability of banks to pay high dividends or bonuses in case of hard times)

2 Countercyclical Buffer

   Prevent excessive credit growth
   Macro-prudential buffer add-on to the capital conservation buffer
    designed to protect the banking sector from period of excess credit
    growth
   Will be country-dependent, i.e. function of where the bank has exposures
    to the private sector

                                                                              May 2011
  PwC                                                                          Slide 17
 Part 1 - Basel III recent developments
 Summary of upcoming changes

3 New leverage ratio

   Know your own limits
   Simple and transparent ratio designed to put a cap on the build-up of
    leverage in the banking sector as well as to introduce additional
    safeguards against model risk and measurement errors

   Volume-based ratio, not risk adjusted, to complement the risk-based
    minimum capital requirements under Pillar 1:

        • Total Tier 1 Capital / Total Exposures (on- and off-balance sheet)

   Credit Conversion Factor of 10% applies to unconditionally cancellable
    commitments (whereas 0% for solvency ratio)!

   The Committee is proposing to test a 3% Tier 1 leverage ratio

   Supervisory monitoring starts in 2011! Migrates to Pillar 1 in 2018

                                                                             May 2011
  PwC                                                                         Slide 18
 Part 1 - Basel III recent developments
 Summary of upcoming changes

4 Higher minimum ratios

                                                                                 Minimum Ratios      Transition
                                                                                 Current Basel III     Period


12%
                                                           Total Capital         8%-10%    10.5%     2016-2019

10%
                                                           Tier 1 Capital        4%-6%     8.5%      2013-2019
 8%

 6%                                                        Conservation Buffer     NA      2.5%      2016-2019



 4%
                                                           Tier 1 Common         2%-3%      7%       2013-2019


 2%
                                                           Tier 1 Leverage         NA       3%       2013-2018
 0%
       2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
             Current Levels      Basel III Levels
                                                                                                     May 2011
 PwC                                                                                                  Slide 19
 Part 1 - Basel III recent developments
 Summary of upcoming changes

5 Systemic add-on

  Be responsible
  Development of policy options designed to reduce risks related to the
   failure of systemically relevant, cross-border institutions (SIFIs)

  Two aspects under consideration:
     1. Decrease the probability of failure of a systemic bank
           •   Systemic banks will face increased regulatory supervision
           •   Systemic banks will have extra capital buffers to absorb losses

       2. Decrease the impact of failure of a systemic bank
           •   Requirements for recovery and resolution plans (expected mid-2011)
           •   Preparatory and preventative measures (‘living wills’)
           •   Supervisors will have the powers to take action before problems become
               severe (including the replacement of management)
           •   Powers to force a takeover by a sound institution or to transfer all or part
               of the activities to a bridge bank to ensure continuity of services

                                                                                       May 2011
 PwC                                                                                    Slide 20
 Part 1 - Basel III recent developments
 Summary of upcoming changes

6 Liquidity Coverage Ratio

   Stay afloat – Weather the storm
                              For many institutions, the liquidity challenge is
                               likely to be greater than the capital challenge.

  Liquid Assets               Objective: Ensure that a bank maintains an adequate
                               level of high-quality, unencumbered assets to enable
                               it to weather a severe stress scenario specified
                    > 100%     by supervisors
  Net Cash
  Outflow over                Short-end of a bank’s counterbalancing capacity
  30 Days

                              Net cash outflows calculated according to strict
                               parameters specified by supervisors

                              Stock of highly liquid assets subject to
                               quantitative and qualitative eligibility criteria

                                                                                   May 2011
  PwC                                                                               Slide 21
 Part 1 - Basel III recent developments
 Summary of upcoming changes

7 Net Stable Funding Ratio


   You are in it for the long run
                              Objective: Provide incentive for structural
                               changes to shift from short-term funding profiles to
  Required                     more stable, longer term funding profiles and
  Stable
  Funding                      reduce reliance on wholesale funding

                    > 100%
                              Medium- to long-term orientation

  Available                   Assets (on- and off-balance sheet) are assigned
  Stable Funding
                               required stable funding factors

                              Liabilities are assigned available stable funding
                               factors



                                                                                   May 2011
  PwC                                                                               Slide 22
Likely IT
and Operational Impacts




                          May 2011
PwC                        Slide 23
Part 1 - Basel III recent developments
Likely IT and Operational Impacts

 Systems Impacts
     Liquidity risk: Use of SWIFT messages for intraday liquidity monitoring, granularity
      required for NSFR computation & forecasting needs a very significant boost
     Inter-connectivity: Accounting information, client-data and risk systems need to be
      interconnected ever more (Large Exposures, Leverage Ratio, stress-testing, …), connect to
      Central Counterparties for OTC derivatives clearing
     Flexible processes and infrastructures that may be amended and fine-tuned as new
      reporting requirements arise
     Automation: Best-of-class already have ability to reconcile data, compute ratios and check
      limits on a daily basis


         Operational Impacts
            New processes and procedures to comply with new functionalities
            New reporting & disclosures that require the implementation of additional
             processes and controls
            Rationalisation: Basel III may be a unique opportunity to streamline various
             reports and disclosures production that share common data sources (FINREP,
             COREP, Pillar III, MIS, annual accounts, LFR ...)
            Training of staff and Senior Management, as regulations become ever more
             complex
                                                                                               May 2011
PwC                                                                                             Slide 24
Thank you
Emmanuelle Henniaux                       Thierry López
Partner                                   Partner
Regulatory Compliance Advisory Services   Risk Management Leader
emmanuelle.henniaux@lu.pwc.com            thierry.lopez@lu.pwc.com
+352 49 48 48 2549                        +352 49 48 48 4011

Alexandre Lambin                          Jean-Philippe Maes
Director                                  Senior Manager
Basel II/III expert                       Risk Management Services
alexandre.lambin@lu.pwc.com               jean-philippe.maes@lu.pwc.com
+352 49 48 48 2533                        +352 49 48 48 5719




                                                                     May 2011
PwC                                                                   Slide 25
ICAAP update and
new Circular on stress tests
Claude Wampach
Surveillance des banques, CSSF
 ICAAP Update and Stress
Testing Circular CSSF 11/506

PwC Basel III: Risk Management Perspectives
                     2011


             Claude Wampach
                   May 2011


                                          27
Agenda


 Introduction
 Update on ICAAP
 Stress Testing – Circular CSSF 11/506




                                          28
Agenda


 Introduction
 Update on ICAAP
 Stress Testing – Circular CSSF 11/506




                                          29
                                                       Introduction




ICAAP and Stress Testing



        Pillar I         Pillar II        Pillar III



 Stress tests form an integral part of internal risk management
  practices (“Pillar 2”) and of regulatory requirements (as imposed
  in the context of the advanced models under “Pillar 1”)
 The tests have to be documented in particular via the ICAAP
  report which the Authorized Management submits at least
  annually to the Board of Directors with copy to the CSSF
                                                                      30
Agenda


 Introduction
 Update on ICAAP
 Stress Testing – Circular CSSF 11/506




                                          31
                                         Update on ICAAP




Supervisory Review Process (SRP) under CRD II

 Law of 28 April 2011 (Memorial A - No 81) and circular
  CSSF 06/273 as amended
 Joint (college) decision under Article 129(3) CRD on
  capital adequacy and ICAAP
 CEBS (EBA) Guidelines 39 on joint assessment under
  SRP, including ICAAP
    Reform of circular CSSF 07/301 with respect to the
     ICAAP report



                                                           32
                                          Update on ICAAP




SRP under CRD IV/Basel III

 Pillar 2 (ICAAP↔SRP) remains a key building block of the
  supervisory framework
 EBA technical standards (“common risk assessment
  methodology”)
 Joint (college) decision on the overall risk bearing
  capacity, including liquidity




                                                             33
Agenda


 Introduction
 Update on ICAAP
 Stress Testing – Circular CSSF 11/506




                                          34
                            Stress Testing – Circular CSSF 11/506




Objective-driven definition of “stress testing”

 Practice aimed at assessing to what extent adverse events
  could threaten the coherence between the business
  model, the (target) risk profile and the risk bearing capacity
 with a view to take corrective action in order to safeguard
  the financial and operational soundness of the institution




                                                                    35
                         Stress Testing – Circular CSSF 11/506




Global internal coherence



                           Business
                            Model




          Risk Bearing                  Target Risk
            Capacity                      Profile


                                                                 36
                          Stress Testing – Circular CSSF 11/506




Stress testing the internal coherence


     Stress Tests

                            Business
                             Model




           Risk Bearing                  Target Risk
             Capacity                      Profile


                                                                  37
                        Stress Testing – Circular CSSF 11/506




Internal governance




                       Board of
                     Directors and
                      Authorized
                     Management



         Board of                     Authorized
         Directors                   Management

                                                                38
                      Stress Testing – Circular CSSF 11/506




Internal governance (cont’)

              Regular assessment of the robustness of
               the stress testing program
              Delegation of the implementation of a
 Board of      robust stress testing program to the
 Directors     Authorized Management




                                                              39
                        Stress Testing – Circular CSSF 11/506




Internal governance (cont’)

               Regular critical review and validation of
                the main methodological choices and
                hypotheses as well as of the chosen
 Authorized
                scenarios
Management     Responsible for the implementation of a
                robust stress testing program
               Annual      plan     of    stress   tests,
                documentation of the main characteristics
                (scope, frequency, calibration)



                                                                40
                          Stress Testing – Circular CSSF 11/506




Internal governance (cont’)

                 Regular analysis of stress test results
                 Assessment of coherence between
                  business model, risk profile and risk
  Board of        bearing capacity in the light of the stress
Directors and     test results
 Authorized      Corrective measures in terms of:
Management         – Business model,
                   – Risk profile,
                   – Risk bearing capacity.




                                                                  41
                           Stress Testing – Circular CSSF 11/506




Robust stress testing

 Scope is comprehensive
 Concentration risks are fully addressed             (lack   of
  diversification or common risk factors)
 Scenarios comprise “extreme” stress events
 Infrastructure is appropriate and sound (proportionality)
 Planned credible corrective measures
 Regular independent review



                                                                   42
                              Stress Testing – Circular CSSF 11/506




Proportionality principle and stress test methodology

The requirements of the circular have to be implemented
proportionally with regards to the scale, diversity and
complexity of the institution’s activities and organization:

                                    Assessment of resilience
  Qualitative program               vis-à-vis internal and
  is mandatory                      external negative
                                    developments

  Quantitative program              - (Simple) Sensitivity analysis
  following the                     - (Complex) Scenario
  proportionality principle           analysis
                                                                      43
                           Stress Testing – Circular CSSF 11/506




Inverse stress testing

                   Identification of a significant negative
                   outcome

                  Identification of causes and consequences
                  that could lead to such an outcome

Identification of possible combinations of events and risk
concentrations within an institution that might not be
generally considered in regular stress testing



                                                                   44
                          Stress Testing – Circular CSSF 11/506




Use of group stress testing resources

 Accepted (and encouraged), to the extent that
    the situation of the Luxembourg based entity is fully
     captured and that
    local management is in a position to fully discharge its
     responsibilities under circular CSSF 11/506




                                                                  45
Thank you for your attention!




Claude Wampach




                                46
Bankers View
Paul Marcy
Risk Manager, Banque Raiffeisen
            Basel III: Beyond the regulation

       event

May 25th, 2011


Paul Marcy, Head of Risk Management
Agenda




    1.   A question of philosophy

    2.   LCR / NSFR

    3.   ICAAP and Internal Stress Tests

    4.   Internal Governance




                               2
Agenda




    1.   A question of philosophy

    2.   LCR / NSFR

    3.   ICAAP and Internal Stress Tests

    4.   Internal Governance




                               3
A question of philosophy

  Rules are not necessarily sacred, principles are.”
                    Franklin D. Roosevelt




  ► What kind of regime provides a more effective
    regulatory approach ?
  ► What kind of regime promotes comparability and
    convergence among different international jurisdictions ?
  ► Impossible to choose one over the other.

   Each regulatory model should endeavor a combination of rules and
                              principles




                                            4
Agenda




    1.   A question of philosophy

    2.   LCR / NSFR

    3.   ICAAP and Internal Stress Tests

    4.   Internal Governance




                               5
LCR / NSFR

► Both the Liquidity Coverage Ratio (LCR) and
  the Net Stable Funding Ratio (NSFR) will be
  binding Pillar 1 ratios.

► CRD IV (rules for the new capital and
  liquidity requirements) will introduce these
  two ratios by the end of 2011.



                                                                                             *source BCL




► The ratios and underlying components will need to be reported to Supervisors starting January
  2012. LCR (NSFR) observation period will be held until January 1, 2015 (January 1, 2018).

 ► The LCR will be introduced as a binding constraint on January 1, 2015 and the NSFR will
   become a minimum standard by January 1, 2018.


                          Rule-based regulation


                                          6
LCR / NSFR

Bank Raiffeisen started to implement both ratios on December 2009.

The new ratios challenged the Bank in several aspects:


    ► Strategy / business model

    ► Implementation of regulatory requirements

    ► Costs



Bank Raiffeisen implemented proper stress tests in line with its risk profile: → the
results of these simulations helped us to understand the implications of the new
regulations on the Bank.


      Rule-based regulation with an “opening” to principle based regulation




                                          7
Agenda




    1.   A question of philosophy

    2.   LCR / NSFR

    3.   ICAAP and Internal Stress Tests

    4.   Internal Governance




                               8
ICAAP of the Bank and Internal Stress Test

► The underlying aim of Pillar 2 processes is to enhance the relation between a
  bank’s risk profile (risk appetite), its Risk Management, its risk mitigation tools
  and its capital management (internal planning and management of the capital).

► ICAAP is an internal process of a bank and supervisors are fixing the framework
  i.e. principle based approach.

► The dialogue between the bank and its supervisor is a key element of the
  supervisory review process (“Dialogue structuré”).




                                     9
CEBS’ EU-wide Stress Test and ICAAP

► Bank Raiffeisen was invited to participate in the 2010 EU-wide stress testing
  exercise coordinated by the EBA.

► These stress tests complement the Risk Management procedures and regular
  stress testing programs set up in Bank Raiffeisen under the Pillar 2 framework
  of the Basel II and CRD1 requirements.

► Even if Bank Raiffeisen was not subject to the 2011 EU-wide stress testing
  exercise, Risk Management will follow up the exercise to ensure an update of
  the ICAAP process.




                                   10
CEBS’ EU-wide Stress Test and ICAAP

► Besides the fact that the results of the CEBS’ EU-wide Stress Test were in line
  with our expectations, they offered Bank Raiffeisen a unique opportunity to
  challenge its ICAAP:

        Improve stress testing and scenario definitions (assumptions) by using the data
        provided to complete the exercise (benchmark of PD, LGD and adverse scenario).

        Enhance internal communication on ICAAP to the business lines (data suppliers) to
        ensure the appropriateness of the data and its quality.

        Completion of the risk management techniques to assess credit risk.

        Assess the needs of the future IT systems of the bank.

    Bank Raiffeisen had the opportunity to benchmark its internal risk approach
                                  under ICAAP




                                      11
Agenda




    1.   A question of philosophy

    2.   LCR / NSFR

    3.   ICAAP and Internal Stress Tests

    4.   Internal Governance




                            12
Internal Governance
Principle 17- Risk Culture (CP on the Guidebook on Internal Governance)
An institution should develop an integrated and institution-wide risk culture, based on a full
understanding of the risks it faces and how they are managed, taking into account its risk
tolerance/appetite.

► The Risk Management function is responsible for identifying,
  measuring, monitoring, controlling or mitigating, and reporting of risk
  exposures.

► Every member of the organisation should be fully aware of his or her
  responsibilities relating to Risk Management. Risk Management should
  not be limited to risk specialists or control functions.

► Business units, under the oversight of the management body, should
  be primarily responsible for managing risks on a day-to-day basis,
  taking into account the institution’s risk tolerance/appetite and in line
  with its policies, procedures and controls.


        Governance is the most important piece of the puzzle
Conclusion


   Every regulatory model has to be a combination of rules and principles



   Strong governance is essential in Risk Management


                            but

     “Capitalism without failure is like religion
                   without sin”

                                              Prof. Allan Meltzer
The new liquidity requirements
view from the industry
Gilles Pierre, Banking Supervision, ABBL
Basel III - New Liquidity Rules: Views
       of the Banking Industry


                  Gilles PIERRE, ABBL
                  May 25, 2011
                Agenda

Open Issues

Expected Impacts

LCR at Solo Level




                         50
                Agenda

Open Issues
Expected Impacts

LCR at Solo Level




                         51
       A (Short) Sample of Issues
LCR

1. Buffer of HQLA too narrow => concentration risk
2. Corporate banking: 75% outflow on corporate
   deposits
3. Mortgage lending: 50% inflow only
4. Cap on inflows => minimum buffer (floor)
5. Covered bonds: HQLA + perspectives of issuing
   banks
6. Scope of application => Intra-group liquidity
7. Level playing field vs. the USA
                                                     52
       A (Short) Sample of Issues
NSFR

1. No appetite in the market to extend longer term
   funding

2. 1 year wall => Cliff effect, not enough granular

3. Maturity transformation is necessary




                                                      53
                Agenda

Open Issues

Expected Impacts
LCR at Solo Level




                         54
                Expected Impacts
1. Increased Costs
   Direct costs: IT systems, staff
   Indirect costs: lower profitability due to buffers

2. Business models and structures
   Specialised banks: custodians, covered bonds
   Subsidiaries vs. branches

3. Concentration risk: buffers

4. Observation period: managing the expectation gaps

                                                        55
               Agenda

Open Issues
Expected Impacts

LCR at Solo Level




                        56
                  LCR at Solo Level
Basel rules are calibrated for big cross border banks groups
and for application at the consolidated level only

In the EU, rules apply to all banks (i.e. nationally and
internationally active) at consolidated and at solo (i.e. legal
Entity) level

Basel controversial decision: minimum buffer (floor) =
25% of the outflows

Rationale: to prevent banks from relying solely on anticipated
inflows

                                                                  57
                LCR at Solo Level
Unexpected consequence in the EU:

1. Minimum buffer to be held at legal entity level:
   subsidiaries, non-EU branches (if not subject to
   equivalent EU rules)

2. Liquidity is trapped at legal entity level, even for liquid
   banks where inflows > outflows

Potential response: WAIVER for applying LCR at the
consolidated (sub-consolidated) level ONLY
                => PROPORTIONALITY
                                                                 58
Bank X: Without the Minimum Buffer
           ASSETS                     LIABILITIES

            100                              20

                                          CAPITAL

          INTERBANK
                                             80

           LOANS                      INTERBANK
Inflows
 + 100                                    DEPOSITS    Outflows
          < 30 DAYS
                                                        - 80
                                          < 30 DAYS


                      NET INFLOW = + 20
                         NO BUFFER
                                                                 59
   Bank X: With the Minimum Buffer
           ASSETS               LIABILITIES

             20                     20

           BUFFER                CAPITAL


             80                     80

          INTERBANK             INTERBANK
Inflows
  + 80     LOANS                 DEPOSITS     Outflows
                                                - 80
          < 30 DAYS              < 30 DAYS


                NET INFLOW = 0
          MINIMUM BUFFER = 25% * 80 = 20
                                                         60
Thank You!


             61
Roundtable - How to prepare
for the new requirements?
Patrizio Borgognoni, Executive Director, UBS
Claude Ludovicy, Head of Risk Portfolio Mgt, BGL BNP Paribas
Paul Marcy, Risk Manager, Banque Raiffeisen
Gilles Pierre, Banking Supervision, ABBL
Claude Wampach, Surveillance des banques, CSSF
Moderated by: Thierry López, Risk Mgt Leader, PwC
Emmanuelle Henniaux
Partner, PwC
Thank you

								
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